This week, we look at the Swedish election results, three pieces of news out of the UK, EU and US and flag three upcoming official data releases. We also highlight how the Tactical Asset Allocation process is unfolding at 7IM.
Sunday’s Swedish election has left the two main coalition blocs neck and neck, while the right-wing Sweden Democrats saw a 5% swing in its favour. A protracted process to form a coalition seems set, given that the Alliance parties believe they should now take the helm, while the parties tied to the Social Democrats are determined to stay in power. Both the main party alliances have ruled out forming a government with the Sweden Democrats despite one in six Swedes voting for them. The results highlight that the wave of nationalism across Europe has not yet had its day some three years on from Europe's biggest influx of migrants and refugees since World War II.
UK services – which account for about 80% of UK GDP – helped the composite IHS Markit Purchasing Managers’ Index (PMI) to an acceleration in growth over August as the numbers grew from 53.5 to 54.2. Numbers for the service sector also flagged an increase in the rate of growth to 54.3 in August from 53.5 in July. The numbers come despite the slightly lower construction PMI numbers which fell to 52.8 in August versus 53.8 in July, but mean that the UK economy is likely to remain on track to deliver GDP growth of 0.4% for Q3 2018, on a par with Q2 2018 and up from the Q1 0.2% growth. The services PMI also reported encouraging forward looking numbers as well.
The EU is apparently set to give its Brexit negotiator, Michel Barnier, new instructions and increased powers to make decisions on behalf of the whole of the EU to help close a deal with Britain. This move looks likely to help Theresa May’s Chequers Deal. The news came from an informal summit being held in Salzburg between the remaining 27 members. However, significant objections to the UK proposals remain and, as such, some decisions as to the future relationship may even need to be made after an overarching deal has been signed.
Average hourly earnings rose 2.9% in August year-on-year, according to the Bureau of Labor Statistics, as companies raised pay packets to attract and retain workers in an increasingly tight labour market. Published alongside stronger than expected hiring statistics, the numbers are likely to keep the Federal Reserve on track for two more short term interest rate rises in 2018. The news also prompted an increase in the value of the US Dollar, which could cause further concerns for emerging markets who have billions in US Dollar-denominated debt.
This week sees the 7IM Investment Team concluding their asset allocation discussions as to where financial markets may move over the next three to 18 months. It also sees the external views being gathered from the Asset Allocation Committee with decisions then implemented and changes to any portfolio positions made.
Globally, the team remains broadly positive on equities given that volatility is a normal occurrence, with most markets seeing a 10% drawdown in most years. Meanwhile, the view on bonds remains cautious given interest rates have only just begun to rise. Domestically, there remains no clear view on an outcome or a timeline for Brexit aside from the potential GBP moves in our scenario planning. As such, our focus will be on exposure management.
THREE ANNOUNCEMENTS DUE THIS WEEK
13 Sep – EU Interest Rate Decision // 13 Sep – UK Interest Rate Decision // 13 Sep – US Inflation Rate (Aug)
SOURCES: BLOOMBERG, IHS MARKIT, REUTERS, 7IM
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